Financial Sinkhole States In The Trump Tax Era

[Arnie]

What damage will the loss of a deduction do to blue states with stiff taxes?

Do you live in a sinkhole state? There are eight of them, led by California and New York.
These are places where the population dependent on the state — for employment, welfare or a pension — is larger than the population feeding it. That excess of takers over makers is recipe enough for trouble when the next recession hits. But now some of the sinkholes have a new worry.
The Trump tax law enacted in December just about killed the federal deduction that prosperous people take for state income taxes. In states with stiff taxes, the cost of living has suddenly gone up.





Now high-income folks who pay the bills for big government in California, Illinois and New York will be even more motivated to decamp for Nevada, Florida or Texas. If they leave, a dwindling group of productive workers will be left to shoulder a rising financial burden.

Here are the eight states with sinkhole status:

https://blogs-images.forbes.com/baldwin/files/2018/01/Sinkhole_States.jpg?width=960

 

[sle]

Well, people who could simply take off and leave have the means to set up pass-through entities. There are other means of tax avoidance that everyone should be exploring. I know I will, certainly.

I certainly can’t see myself or any of the people I know in finance moving to Nevada. Let me put it this way - nobody is going to leave the sinkhole states for the shithole states.

 

[DaveV]

I certainly can’t see myself or any of the people I know in finance moving to Nevada. Let me put it this way - nobody is going to leave the sinkhole states for the shithole states.

I use to agree that very few wealthy would leave a state just because of taxes. Too many ties (family, friends, activities) to make it worth their while. But in 2019, a lot of wealthy people in high tax states like New York and Connecticut are going to have a rude awakening that their net state income has risen 65% per year, because they can now only deduct $10,000 max on their IRS 1040. The increase will be even more if they have a mortgage that is no longer fully deductible. At that high an increase, people will think of leaving.

 

[Scataphagos]

I use to agree that very few wealthy would leave a state just because of taxes. Too many ties (family, friends, activities) to make it worth their while. But in 2019, a lot of wealthy people in high tax states like New York and Connecticut are going to have a rude awakening that their net state income has risen 65% per year, because they can now only deduct $10,000 max on their IRS 1040. The increase will be even more if they have a mortgage that is no longer fully deductible. At that high an increase, people will think of leaving.

I suspect most of them/us will just grumble and stay put... "taking it in the shorts".

 

[sle]

I use to agree that very few wealthy would leave a state just because of taxes. Too many ties (family, friends, activities) to make it worth their while. But in 2019, a lot of wealthy people in high tax states like New York and Connecticut are going to have a rude awakening that their net state income has risen 65% per year, because they can now only deduct $10,000 max on their IRS 1040. The increase will be even more if they have a mortgage that is no longer fully deductible. At that high an increase, people will think of leaving.

Wait, how do you arrive at 65%? For company owners, the taxe rates are actually going down and they are not as concerned about real estate taxes since they usually own properties via SPVs. For most high income working people (i.e. investment bankers or hedge fund PMs like myself, who get paid on w4), the changes in total tax load are benign relative to overall income volatility. Let's put it this way - if this is something that puts you in a state where you need to consider leaving the NYC/tristate area, you got bigger problems.

 

[DaveV]

Wait, how do you arrive at 65%?

I have not read about it anywhere so I hope my math is wrong, but here is how I calculated it:

In 2017: Gross income $500,000, state tax at 9%, IRS marginal tax rate 39.5%.
Net state tax after IRS deduction = ( $500,000 * 9%) * ( 1 - 39.5%) = $27,225

In 2018: Gross income $500,000, state tax at 9%, IRS marginal tax rate 37%.
Net state tax after IRS deduction = ( $500,000 * 9%) = $45,000.

$45,000 / $27,2225 = 1.65

For simplicity, I am ignoring the maximum 2018 IRS $10,000 deduction since a) this will probably be used up for mortgage deduction, and b) the higher the income goes, the less it will affect the net state tax.

 

[sss12]

Wait, how do you arrive at 65%? For company owners, the taxe rates are actually going down and they are not as concerned about real estate taxes since they usually own properties via SPVs. For most high income working people (i.e. investment bankers or hedge fund PMs like myself, who get paid on w4), the changes in total tax load are benign relative to overall income volatility. Let's put it this way - if this is something that puts you in a state where you need to consider leaving the NYC/tristate area, you got bigger problems.

To continue this line of thinking...I'm in CT....how many tax payers have big state income tax and big real estate tax burden that is being limited that DO NOT also have big wage income where the reduction in tax at the federal level and reduction in AMT off set this ?

If you are making 40k a yr you are NOT paying 20k in RE tax/state income, you don't have the cash flow.

Most of the people I know, upper to upper/middle are probably coming out slightly ahead.

People are still bitching and "looking" to move out, but no more than before.
Also, I haven't found the Utopian local to move to. (the thread on that topic not withstanding.)

 

[sss12]

I have not read about it anywhere so I hope my math is wrong, but here is how I calculated it:

In 2017: Gross income $500,000, state tax at 9%, IRS marginal tax rate 39.5%.
Net state tax after IRS deduction = ( $500,000 * 9%) * ( 1 - 39.5%) = $27,225

In 2018: Gross income $500,000, state tax at 9%, IRS marginal tax rate 37%.
Net state tax after IRS deduction = ( $500,000 * 9%) = $45,000.

$45,000 / $27,2225 = 1.65

For simplicity, I am ignoring the maximum 2018 IRS $10,000 deduction since a) this will probably be used up for mortgage deduction, and b) the higher the income goes, the less it will affect the net state tax.

Aren't you missing that for under $1mm income AMT is effectively going away ?

 

[DaveV]

Aren't you missing that for under $1mm income AMT is effectively going away ?

I did not factor in any AMT. Fortunately, I have only ever had to pay it once in my lifetime.

 

[sle]

I have not read about it anywhere so I hope my math is wrong, but here is how I calculated it

I had a chat with my accountant, so I can't remember the details. The long story short, a guy making a million cash in the city of New York and paying 15k in property taxes will pay additional 7k in taxes. I pay more to garage my car - yes, I bitch and moan "this fucking city", but I have not moved out yet Considering that an average Manhattan middle school is 45-55k per year, 7k is a relatively benign.

The mortgage issue is negligible - you only aren't allowed to deduct interest on additional amount over the new threshold (used to be a million, now it's 750 and it's only on new purchases).